Review of Accounting Ethics
Ellen L. Landgraf
Associate Professor of Accounting
Loyola University Chicago
E-mail: elandgr@luc.edu
"The Enron/Andersen affair is producing endless analysis and punditry. Yet to dismiss the events as a simple technical failure susceptible to a technical fix would be a serious misunderstanding of what went wrong Enron/Andersen is a moral problem, and denying this is to seriously miss whatever point it may have." [Note 1]
Enron, Tyco, WorldCom and other accounting scandals produced a myriad of books and popular press articles on accounting and business ethics. This article is a critical review of one such publication, Accounting Ethics (Ronald F. Duska and Brenda Shay Duska. Blackwell Publishers, Foundations of Business Ethics Series, 2003). The academic community (even prior to recent scandals) continually strives to incorporate an ethical dimension into their respective curriculum. One way of accomplishing this is to be aware of recent publications in the field of ethics. This review is augmented by the author's personal experience in the practice, research, and teaching of accounting (and ethics).
The book Accounting Ethics, written by Ronald and Brenda Duska begins with a detailed chronology of the Enron/Andersen affair (and WorldCom) as reported by the Wall Street Journal. Through this preface of over fifty pages it is apparent that it is not only the accounting profession that is in crisis. The popular press reveals that the alleged lack of moral/ethical behavior and involvement in the Enron/Andersen affair extends also to bankers, security analysts, Wall Street, regulators, and the news media. Twenty-six individuals have been charged (this includes nineteen former executives of Enron and Merrill Lynch & Co. awaiting scheduled trials in 2004). Six former Enron executives, as well as David Duncan, have already pled guilty. A more recent Washington Post article [Note 2] summarized the involvement of the banking community: Canadian Imperial Bank of Commerce (CIBC) agreed to pay $80 million in fines related to concealment of loans to Enron which enabled them to inflate profits by $1 billion from 1998 to 2001. In 2003 J.P. Morgan Chase and Co., Citigroup Inc., and Merrill Lynch and Co. settled similar federal charges by agreeing to pay $135 million, $120 million and $80 million respectively.
The Enron/Andersen affair is strangely reminiscent of the savings and loan scandal of the 1980s involving a conglomerate of diverse players. At that time, the accounting profession was also "in crisis" according to both the popular and academic press, not to mention Congress. Crisis leads to reaction and reform. The Duskas' book on accounting ethics is both reactionary (in terms of Enron/Anderson) and informative (with regard to the nature of the accounting profession.) The Duskas dedicate over thirty-five percent of the book to the Enron chronology (Preface) and Appendices, which include the AICPA Code of Professional Conduct as well as promulgated Standards, Statements and SEC Requirements relative to the practice of accounting.
The Duskas introduce the reader to the study of accounting ethics through vignettes adapted from Arthur Andersen and Co.'s Business Ethics Program: Minicase Indexes, 1992. Research supports the argument that ethics can be taught [Note 3], indicating that most young people are capable of making value based decisions within a limited context. However, younger or less experienced individuals are hindered by a lack of experience in making these decisions, as well as a lack of comprehension regarding the consequences of their actions on society. Students possess very limited frames of reference. While students are able to articulate a clear definition of right and wrong on a one-to-one basis they may not possess the ability to foresee how their behavior within a business situation can affect the public interest. Furthermore, students are often unable to articulate their own values in a leadership role. For the above reasons, vignettes and/or cases are important in accounting and ethics education. Vignettes give a context to the ethical decision-making process. The dilemmas presented in the Introduction to the Duskas' book are not new; they are readily available on the market from other sources besides Arthur Andersen-a peculiar choice for this book.
In Chapter 1 the Duskas describe "The Nature of Accounting and the Chief Ethical Difficulty: True Disclosure." In the context of the Rite Aid example, a brief and easily understandable overview of the nature of the accountants' work, the pressures accountants are subjected to and difficulties in application of "the rules" (Generally Accepted Accounting Principles (GAAP)) are presented. In addition to the "true disclosure" issue, other ethical difficulties (conflict of interest and the role of independence and objectivity) are also discussed. While disclosure is an important component of any discussion of accounting ethics, some would argue that the more complicated ethical issues arise due to features external to the profession itself, which cause moral difficulty for an individual and/or professional. In other words, the chief ethical difficulty for the accountant has its roots in independence and objectivity. Whether an accountant is viewed as an employee, management, consultant or independent auditor, conflicts of interest arise based upon these primary virtues of objectivity and neutrality that are associated with the accounting professional.
These conflicts are certainly apparent to the public accountant (or the management accountant) who hopes to serve the public interest by acting in a neutral and objective manner, yet at the same time serve the client (or employer) who pays him or her and has a specific interest in the outcome. This is part of the extensive literature on moral hazard and agency theory. Dilworth advocates "the articulation and development of committee structures of accounting which include complementary and perhaps competing kinds of professionals (to) help ensure the ethical consequences of such (conflicting) interests become more manageable at a stage in the accounting process where resolution might be achieved and before the ramifications of denial are compounded in a final product or report which suppresses a conflict of interest and/or an alternative perspective." [Note 4]
With respect to Enron and Riteway (as mentioned by the Duskas) any discussion of accounting and ethics should transcend beyond what we presently have, which has been a fairly predictable cycle of crisis (Savings and Loan, Enron, WorldCom), whistle blowers, more rules and regulations, and, finally, a conclusion that the whole thing was an aberration:
One must illustrate the ways in which ethical considerations enter the field of accounting in constitutive and epistemologically unavoidable ways: through forms of representation, through framing of information and the determination of what information is relevant, by assuming a particular audience for the information, and by assuming certain purposes and functions of the information. Acknowledgement that such considerations are epistemologically constitutive of accounting makes the intrusion of ethics in accounting an unavoidable and less arbitrary one. [Note 5]
With regard to the establishment of communicative committee structures with diverse membership, the PCAOB may be a start. Subsequent to publication of the Duskas' book, the Sarbanes-Oxley Act was passed in 2002. This Act established an oversight board, the Public Company Accounting Oversight Board (PCAOB). Two of the five member board must be CPAs; however, the other three members cannot be. The PCAOB has the authority to prescribe auditing standards or accept the private sector Auditing Standards Boards (ASB) standards and pronouncements. Actually, the SEC has the authority, currently (and has always had), to dictate GAAP. Historically, the SEC has yielded that authority to the accounting profession, which has promulgated GAAP through the Financial Accounting Standards Board (FASB), a private sector organization that replaced the Accounting Principles Board (APB) in the 1970s. Anyone interested in the accounting profession and ethics would be well-advised to research these current changes and ramifications to the profession not covered in this book.
Through vignettes from the popular press the Duskas take the reader through a tour of unethical behavior, the need for "ethical sensitivity and behavior" in accounting and a process of thinking about ethical dilemmas in Chapter 2. Chapter 3, "Ethical Behavior in Accounting: Ethical Theory," takes the reader from the moral dilemmas previously presented to competing ethical theories utilized to solve those dilemmas. A basic primer on competing theories--Utilitarian, Deontology, Egoism and Virtue Ethics--is presented.
Accounting ethics are generally considered applied ethics, which are considered by some to be more concrete than philosophical ethics: "The most abstract part of ethics consists of philosophical enquiry into the characteristics of any kind of ethical judgment. This most abstract enquiry may be purely formal --it may ask whether ethical judgments constitute a kind of knowledge-claim, for instance, and whether, if they do, their truth can ever be known with certainty." [Note 6] An example of this type of inquiry might involve the disclosure issue cited by the Duskas in Chapter 1. This poses an interesting philosophical question not addressed in the book: Does a true picture of the firm exist apart from the constructs involved in generally accepted accounting principles and disclosure requirements?
In Chapter 4 the Duskas explore the notion of accounting as a profession. This chapter is oriented towards the accountant in public practice (the CPA), the recognized professional organization of CPAs (the AICPA), and the AICPA's Code of Professional Conduct (Ethics). This emphasis appeared peculiar to me, since one of the strengths of the book (cited in other reviews) was that it addressed the full range of accounting. There are certainly other professional societies recognized in the accounting profession--the Institute of Management Accountants (IMA) and the Institute of Internal Auditors (IIA), each with their own Codes of Ethics and certifying exams (CMA, CIA). Technical information relative to the accounting profession is constantly changing (as is the problem with most books) and this chapter should not be relied on for current pronouncements. For example, in 48 out of 54 jurisdictions (including the 50 states) candidates today seeking to take the CPA exam must have 150 semester hours in addition to a bachelor's degree.
One generally agreed upon characteristic of a profession is the existence of a code of ethics or rules of professional conduct. A book on accounting ethics would be incomplete without a discussion of the AICPA Code of Professional Conduct. In Chapters 5 and 6 the Duskas undertake this task. As they state on page 85, "Objectivity and independence are perhaps the most important of the principles in the AICPA Code." The full text of the Code is also included in Appendix I, which has been recently revised. The Duskas have articulated very well the implications of independence in both fact and appearance. An accountant can, in fact, be independent, yet he or she is the sole judge of this. Suppose I was an avid jogger on the audit of Nike. In my own mind I could accept discounted or free running shoes and clothes from Nike and, at the same time, render an objective work product. This is independence in fact--not a very useful concept. It is the concept of independence in appearance judged by third parties that is critical to the accounting profession.
On a historical note, the Duskas point out the lack of rules in the code section 400. This section, they correctly note, is reserved for rules related to the accountant's responsibilities to his or her colleagues. Historically, there was a Rule 401 (prior to the early 1970s), which dealt with "encroachment." Accountants were not to raid their colleagues' clients. Since then nothing has been proposed. In light of circumstances occurring after the publication of this book, revisions and additional regulation may be on the horizon.
At some point one has to ask: Why a book on accounting ethics? Enron, it may be argued, has implications for "business ethics" or moral behavior in general as well as in accounting. Perhaps the need to address accounting ethics separately stems from the view of accounting as a recognized profession articulated in Chapter 4. Herein perhaps lies the difference. Although the content of the book is accounting oriented, the authors offer valuable philosophical insights applicable to moral/ethical behavior in general.
The Duskas devote separate chapters (Chapters 7, 8, and 9) to the ethics of auditors, management, financial accountants and tax accountants. These chapters serve adequately to acquaint a non-accountant to the diversity of the practice of accounting, the particular ethical challenges faced by professional accountants, and an overview of the responsibilities and the promulgated standards (or statements) relative to each type of practice. In Chapter 7, "Ethics in Auditing: The Auditing Function," the Duskas discuss "the expectation gap." This term has been around since the aftermath of the savings and loan scandals of the eighties and, basically, deals with the gap between what auditors actually do and what stakeholders actually expect or perceive that auditors (public accountants) do. In the late 1980's the Auditing Standards Board issued ten new pronouncements geared towards narrowing that gap and more clearly delineating the auditor's responsibilities with regard to the financial statements (which are the responsibility and representation of management).
Unfortunately, the Duskas have contributed to that expectation gap. On page 120 they state: "The Cohen Report also insisted that it was a responsibility of the auditor to express an opinion on internal accounting control." They then delve into the discussion of whether or not a public accountant giving an "opinion" on internal control would be objective in also rendering an opinion on the financial statements. Some technical corrections are necessary here. There exists in the AICPA Professional Standards [Note 7] two distinct engagements with standards for each. One is the audit of financial statements (Covered in the AU Sections). An audit of financial statements, the objective of which is an opinion on the fair presentation of financial statements requires that, "A sufficient understanding of internal control is to be obtained to plan the audit and to determine the nature, timing and extent of tests to be performed." The auditor in a financial statement audit does not give an opinion on internal control but rather uses his/her knowledge of internal control to plan the audit of the financials. Separate and apart from an audit of the financial statements, there are standards for another type of engagement, namely an engagement to "examine and report on a management assertion about the design and operating effectiveness of an entity's internal." Again, this is an engagement separate and apart from the audit of financial statements and is considered an "attestation engagement," not an audit and covered by the Attestation Standards (in particular AT400). Performing both of these engagements does present a substantial conflict of interest, and the Sarbanes-Oxley Act of 2002 prohibits this.
Also in Chapter 7, the Duskas discuss the auditing standards relative the Auditor's responsibility regarding Fraud in a Financial Statement Audit. This is done in the context of the Andersen/Enron fiasco. Readers interested in this discussion should also read the latest Standard dealing with these responsibilities, (SAS No. 99) Consideration of Fraud in a Financial Statement Audit, which is effective for audits of financial statements for periods beginning on or after December 15, 2002. Because of publication deadlines, this was probably not included in the book.
In their final chapter, "Ethics of the Accounting Firm," the Duskas address the problem of professionalism versus commercialism. In addressing accounting as a business, with the purpose of maximizing profits or shareholder value, and the tension imposed by the social responsibility of business, this proves to be an interesting read. Also interesting is that the method of calculating profits, central to capitalism and debates of business ethics, was first written on by a 15th century Franciscan friar, the "father of accounting," Luca Pacioli:
In Pacioli's view, besides being 'honest,' profits should also be 'reasonable' the goal of every businessman who intends to be successful, is to make a lawful and reasonable profit therefore, businessmen should begin their business records with the date AD, making every transaction so that they will always remember to be ethical and, at work always mindful of His Holy name. [Note 8]
What would Pacioli say today? He would probably agree with the Duskas' premise--good ethics is good business.The Duskas' book does provide an introduction to the full range of accounting for non-accountants. Their use of real-life examples and moral dilemmas in the context of financial accounting, auditing and tax practice are particularly beneficial to those incorporating an ethics dimension to an undergraduate or graduate accounting, finance, or business ethics class. However, "the most commonly voiced barrier (to the integration of ethical discussion) in every institution is that a tightly packed curriculum leaves little room for adding ethical material." [Note 9] Furthermore, most Introductory Accounting, Financial Accounting and Auditing texts today have ethical vignettes and related assignment material. As the Duskas themselves conclude: "the accounting profession is not so much in crisis as in the midst of substantial change." I believe that it was Einstein that said change is the only constant. Unfortunately, this being the case, the technical material cited in the book has already or will shortly also change.
[1] Verschoor, Curtis. "Accounting Involves Ethics, Not Just Technical Issues." Strategic Finance, 84.3 (2003). [Back to text]
[2] Behr, Peter. "Canadian Bank to Pay $80 Million Fine in Enron Investigation." Washington Post, December 23, 2003, p. E01. [Back to text]
[3] Piper, Thomas R., May C. Gentile, and Sharon Daloz Parks. "Can Ethics Be Taught?" President and Fellows, Harvard College (1993). [Back to text]
[4] Dilworth, John B. "The Ethical Importance of Conflicts of Interest: Accounting and Finance Examples." Business and Professional Ethics Journal, 13 (Spring/Summer 1994). [Back to text]
[5] AICPA Professional Standards, Vols. I & II, American Institute of Certified Public Accountants, 2003. [Back to text]
[6] Shiner, Roger A. "Accounting Ethics: The General Part." Business and Professional Ethics Journal, 13 (Spring/Summer 1994). [Back to text]
[7] AICPA Professional Standards, Vols. I & II, American Institute of Certified Public Accountants, 2003. [Back to text]
[8] Fischer, Michael J. "Luca Pacioli on Business Profits." Journal of Business Ethics, 25.4 (2000). [Back to text]
[9] Poynter, Harry and Cynthia Thomas. "Review: Can Ethics Be Taught?" Management Accounting, 75.7 (1994). [Back to text]
Academic Exchange Extra invites reader responses to any writings in this issue--especially articles advancing the scholarly debate of issues raised.
- Web Editor
| ------------------------------ Page
Citation Reference: AE-Extra. Available Online. [URL: < >. Created: 24 September 2004. Updated: --. Accessed: ] |